Nonprofit hospitals receive favorable tax treatment in exchange for providing socially beneficial activities. Extending this rationale suggests that nonprofit hospital mergers should be evaluated differently than mergers of for-profit hospitals because suppression of competition may also allow nonprofits to cross-subsidize care for the poor. Using detailed California data, we find no evidence that nonprofit hospitals are more likely than for-profit hospitals to provide more charity care or offer unprofitable services in response to an increase in market power. Therefore, we find no empirical justification for applying, as some courts have suggested, different antitrust standards for nonprofit hospitals. (JEL I11, L1, L44)

During the past decade, U.S. hospitals have acquired a large number of physician practices. For example, from 2007 to 2013, hospitals acquired nearly 10% of the practices in our sample. We find that the prices for the services provided by acquired physicians increase by an average of 14.1% post-acquisition. Nearly half of this increase is attributable to the exploitation of payment rules. Price increases are larger when the acquiring hospital has a larger share of its inpatient market. We find that integration of primary care physicians increases enrollee spending by 4.9%.

The growing concentration of physician markets throughout the United States has been raising antitrust concerns, yet the Department of Justice and the Federal Trade Commission have challenged only a small number of mergers and acquisitions in this field. Using proprietary claims data from states collectively containing more than 12 percent of the US population, we found that 22 percent of physician markets were highly concentrated in 2013, according to federal merger guidelines. Most of the increases in physician practice size and market concentration resulted from numerous small transactions, rather than a few large transactions. Among highly concentrated markets that had increases large enough to raise antitrust concerns, only 28 percent experienced any individual acquisition that would have been presumed to be anticompetitive under federal merger guidelines. Furthermore, most acquisitions were below the dollar thresholds that would have required the parties to report the transaction to antitrust authorities. Under present mechanisms, federal authorities have only limited ability to counteract consolidation in most US physician markets.

After a string of failed attempts to block hospital mergers in the 1990s, federal prospective hospital merger enforcement essentially ceased for a decade. Then, in the late 2000s, outcomes in litigated hospital merger cases reversed dramatically, with the FTC prevailing in a number of significant efforts to block hospital mergers. This sharp reversal can be traced back to the development of economic models of hospital competition that, by design, closely match the structure of the industry. These new models provided the enforcement agencies with a more sound theoretical framework—willingness-to-pay analysis—upon which to base their cases and a set of empirical tools for evaluating competitive effects. In this article, I provide an overview of the willingness-to-pay framework and the comparatively new empirical tools, and I describe how both have affected hospital merger enforcement.

We present a new framework for assessing the effects of hospital closures on social welfare and the local economy. While patient welfare necessarily declines when patients lose access to a hospital, closures also tend to reduce costs. We study five hospital closures in two states and find that urban hospital bailouts reduce aggregate social welfare: on balance, the cost savings from closures more than offset the reduction in patient welfare. However, because some of the cost savings are shared nationally, total surplus in the local community may decline following a hospital closure.

In light of recent increased policy attention directed toward health insurance, the next significant health plan merger is almost certain to receive close scrutiny from many quarters, including representatives of providers, such as the American Medical Association and the American Hospital Association, and the U.S. Department of Justice. In this paper, I review the key buy-side economic questions and analytic frameworks that are likely to be at the forefront in future investigations of health plan mergers. In particular, I explain how industry structure implies that shares of purchases from individual providers as well as area-wide shares of purchases are likely to inform antitrust analysis of potential monopsony harm in health plan mergers. I also discuss the appropriate treatment of government payers in calculating and assessing buy-side market shares. I conclude with a discussion of how competition and market power in downstream markets for the sale of commercial insurance interact with the potential exercise of monopsony power in upstream markets for the purchase of provider services.

Government agencies employ a variety of mechanisms for securing goods and services from the private sector. These include posting prices, reimbursing for costs, and soliciting competitive bids. Procurement of healthcare services offers several unique challenges. The supplier can influence the quantity of services provided. It is often difficult to even specify in advance exactly what services are to be purchased. Lastly, quality is difficult to measure. Healthcare purchasers have deployed a variety of payment mechanisms to cope with these challenges. We apply the theory of procurement to the case of cataract surgery. We recommend implementing a system that combines a gatekeeper with competitive bidding among operating physicians who must perform all necessary services, including treatment for complications, within a global fee. We conclude by discussing the strengths and limitations of this proposal.

Effective antitrust enforcement is of crucial importance for countries with a market-based health care system in which hospitals are expected to compete. Assessing hospital market power--a central issue to competition policy--is, however, complicated because the presence of third party payers and the general unobservability of prices make it difficult to apply the standard methods of market definition. Alternative, less formal methods historically employed in the hospital industry have proven inaccurate; these methods were even called inapplicable in a recent US court decision. In this paper, we discuss the strengths and weaknesses of several new approaches to defining hospital markets that are suggested in the recent economic literature. In particular, we discuss the applicability of the time-elasticity approach, competitor-share approach, and option-demand approach to the recently partly deregulated Dutch hospital market. We conclude that the appropriate approach depends crucially on how health insurers contract with hospitals and how patients select their hospital.

Acquiring outlying community hospitals is one approach commonly used by large tertiary care hospitals to increase referrals. Sophisticated acquirers may also seek to selectively increase referrals of more profitable patients. To explore these issues, we study vertical hospital acquisitions. Using a treatment and control framework, we find that roughly 30% of vertical acquisitions lead to a significant increase in referrals. Very few result in decreases. We find that increases are concentrated among patients undergoing more profitable procedures and with more generous insurance. However, we find no evidence that hospitals shun patients with higher expected costs of care.

We measure the effect of five hospital closures on patient and total welfare. While patient welfare necessarily declines because some patients lose access to a hospital, closures also affect costs. Recent research suggests that less efficient institutions are more likely to close and that surrounding hospitals are able to increase efficiency as result of scale economies. Thus, the net effect of closures, and the wisdom of hospital bailouts, is an empirical question. We find that hospital bailouts are usually unwise: on balance the cost savings from closures more than offset the reduction in patient welfare. However, in at least one case, closure led to a decline in welfare and an argument for a small bailout would have been warranted. Preliminary: Please do not cite or quote.

We examine the effects of hospital consolidation on the actual prices paid by preferred provider organizations. We find that price increases following consolidations among nearby hospitals invariably equaled or exceeded median price increases among other hospitals in the same market. Using multivariate regression analysis, we find that consolidation enables hospitals to increase prices in three of the four markets studied; these increases are generally statistically significant. In the remaining market, the measured effect was zero. Our results suggest that some, but not all, consolidations of competing hospitals facilitate price increases. We conclude that antitrust scrutiny of hospital consolidation is warranted.

We call markets in which intermediaries sell networks of suppliers to consumers who are uncertain about their needs "option demand markets." In these markets, suppliers may grant the intermediaries discounts in order to be admitted to their networks. We derive a measure of each supplier's market power within the network; the measure is based on the additional ex ante expected utility consumers obtain from the supplier's inclusion. We empirically validate the WTP measure by considering managed care purchases of hospital services in the San Diego market. Finally, we present three applications, including an analysis of hospital mergers in San Diego.

Antitrust Policy and Hospital Mergers: Recommendations for a New Approach I. IntroductionDuring the 1990s, there were over 900 hospital mergers and acquisitions, many involving hospitals in the same metropolitan areas. 1 These transactions consolidated the hospital industry, dramatically concentrating the supply of hospital services.In principle, several purposes motivated this consolidation.First, consolidation might have facilitated the elimination of excessive beds and services.By the end of the 1980s, the average hospital capacity utilization rate had fallen to 60 percent. 2 Indeed, eliminating excess capacity 3 or duplicative services was a stated goal of many hospital mergers. 4 This consolidation also appears to be a direct response to the simultaneous growth of managed care 5 and the shift to outpatient care in the 1980s and 1990s.Merging hospitals rarely mention a second plausible motive, namely, to enhance market power with respect to managed care organizations (MCOs).MCOs obtain discounts from hospitals' stated charges by threatening to steer patients to alternative hospitals offering more favorable pricing.To make this threat credible, Preferred Provider Organizations (PPOs) generally charge enrollees higher copayments if they visit a non-contracting hospital, while Health Maintenance Organizations (HMOs) usually provide no coverage at all for non-emergency care at non-contracting providers.This threat enables MCOs to play hospitals against each other to extract larger discounts.By consolidating, hospitals can limit the ability of MCOs to steer patients, and thereby resist MCO demands for discounts.1 Irving Levin Associates, a health care research company that tracks hospital mergers, reports 1,042 hospital mergers and acquisitions between 1/1/1993 and 1/1/2001.944 of these transactions were valued at over $10 million.Note, however, that the 1,042 transactions include hospitals involved in multiple transactions.See http://www.levinassociates.com/.

This amicus brief was filed in Federal Trade Commission v. Phoebe Putney Health System, Inc., in which the FTC has obtained review of an 11th Circuit decision that insulated a merger of two nonprofit hospitals from antitrust scrutiny. We make two arguments in the amicus brief. First, there is no compelling theoretical basis for an antitrust exemption for nonprofit hospitals. That is, economic theory provides no determinate conclusions regarding whether nonprofits will exploit market power if given the opportunity. As a consequence, whether there is an economic basis for more favorable treatment of nonprofit hospitals is an empirical matter. Second, there is a strong consensus in empirical research that, in general, nonprofit hospitals do exploit their market power by raising prices. This empirical evidence on the exercise of market power by nonprofit hospitals strongly suggests that they should not be exempt from antitrust scrutiny. Such an exemption would serve the private interests of nonprofit hospitals to the detriment of consumers and society as a whole.